Economists believe the Fed will keep raising interest rates despite the banking turmoil

A majority of senior academic economists polled by the Financial Times say the Federal Reserve will keep raising its key interest rate and keep it above 5.5 percent for the rest of the year, despite the turmoil in the US banking sector.

The latest survey, conducted in conjunction with the Global Markets Initiative at the University of Chicago’s Booth School of Business, suggests the U.S. central bank still has work to do to tackle stubbornly high inflation, even as it grapples with a crisis for mid-sized lenders. following the collapse of the Silicon Valley coast.

Among 43 economists polled between March 15 and 17, days after U.S. regulators announced emergency measures to contain the contagion and strengthen the financial system, 49 percent forecast that the federal funds rate will be between 5.5 percent and 6 percent this year peaks between

This is higher than the 18 percent of the previous survey in December, and compared to the current ratio of between 4.50 percent and 4.75 percent.

Another 16 percent estimated it would rise to 6 percent or higher, while roughly a third thought the Fed would not reach that level and cap its so-called “terminal rate” below 5.5 percent. In addition, nearly 70 percent of respondents said they do not expect the Fed to begin tapering before 2024.

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The policy path predicted by most economists is significantly more aggressive than current expectations, reflected in futures markets for central bank funds, underscoring the uncertainty clouding not only the Fed’s interest rate decision on Wednesday, but the path over the coming months.

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Traders have been playing down how much the Fed will tighten the economy since last Friday amid concerns about financial stability. Now they are betting that the central bank will only raise its key interest rate by another quarter of a percentage point before ending its tightening campaign. This would mean a final payment of just under 5 percent. Bets have also been raised that the central bank will quickly reverse course and cut rates this year.

“The Fed is really caught between a rock and a hard place,” said Christiane Baumeister, a professor at the University of Notre Dame. “They need to continue to fight inflation, but do so now against a backdrop of increased stress in the banking sector.”

Baumeister, who participated in the survey, urged officials not to end their monetary tightening campaign “prematurely,” but called it “a matter of maintaining the Fed’s credibility as an inflation fighter.”

Roughly half of the respondents said that because of the SVB events, they lowered their forecasts for the deposit base rate by the end of 2023 by 0.25 percentage points. About 40 percent were equally divided between the path of no change or perhaps more tightening, as opposed to the central bank policy eased by half a point.

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The majority believed that the actions of the government authorities were “sufficient to prevent further bank runs in the current rate tightening cycle”.

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Jón Steinsson of the University of California, Berkeley, was one of the panelists who concluded that the Fed and its fellow regulators have been successful in curbing the turmoil, saying that “it would be a mistake to change the tightening cycle appreciably.”

The more hawkish stance stems from a more pessimistic view of the inflation outlook.

The majority of economists polled expect the Fed’s preferred measure — the core price index of personal consumption expenditures — to remain at 3.8 percent by the end of the year, roughly a percentage point below January’s level but still well above the central bank’s 2 percent target. . In December, the median estimate for end-2023 PCE was 3.5 percent.

In fact, nearly 40 percent of respondents say it is “somewhat” or “very” likely that core PCE will still be above 3 percent by the end of 2024. This is roughly double the share in December.

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Deborah Lucas, a finance professor at the Massachusetts Institute of Technology who participated in the survey, said she had a more bullish view of the inflation outlook, but cautioned that the Fed’s tools were largely ineffective in addressing what she said was a supply-side problem. shocks, “aggressive” fiscal policy, and increased savings among Americans.

“What the Fed does when it raises interest rates too aggressively is it cuts off needed investment and does very little against inflation,” he said.

One of the ongoing debates is about how significant a credit crunch is underway across the country gripping the regional banking sector.

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Brandeis University economist Stephen Cecchetti, who formerly headed the monetary and economic division at the Bank for International Settlements, said he expects the whole thing to be a “pull back” in demand.

“Financial conditions are tightening without doing anything,” he said of the Fed.

A slim majority expect the National Bureau of Economic Research — the official arbiter of the start and end of a US recession — to announce it in 2023, and most say it will happen in the third or fourth quarter. In December, most thought it would happen in the second quarter or earlier.

Still, the recession is projected to be shallow, with the economy still growing by 1 percent in 2023. Meanwhile, the unemployment rate is forecast to rise to 4.1 percent by the end of the year from the current level of 3.6 percent. . According to 61 percent of economists, the peak will eventually be between 4.5 and 5.5 percent.